If you knew your date of death, retirement planning would be a breeze.
Unfortunately — or maybe fortunately? — you don’t. And that can make planning for retirement extremely difficult. Does your nest egg need to last 20 years? 30 years? 40 years? And what about couples? How should couples go about planning for the likelihood that one spouse — usually the husband — predeceases the other?
Well, if you’re like most people, you’re guessing at this, and guessing quite wrong.
“Many people do not understand longevity well, and those people who plan often do not plan for long enough,” says Anna Rappaport, president of a retirement consulting firm bearing her name and chair of the Society of Actuaries (SOA) Committee on Post-Retirement Needs and Risks.
Becoming familiar with current life-expectancy statistics is the first order of business. “There are two aspects to addressing longevity,” says Noel Abkemeier, the founder of Abkemeier Actuarial and chair of the American Academy of Actuaries Lifetime Income Task Force. “First, understanding it, and then planning an income that will last throughout life.”
You may live much longer than you think. “There have been significant improvements in how long people survive in retirement, especially for wealthier Americans,” says David Blanchett, head of retirement research at Morningstar Investment Management.
Consider: Someone born in 1950 was expected to live to age 68.2. By contrast, someone born in 2014 was expected to live to age 78.8, according to the Centers for Disease Control and Prevention. In other words, someone born today will need to fund an extra 10 years of retirement vs. someone born 66 years ago.
What’s more, life expectancy for those alive at age 65 has also increased dramatically. In 1950, a 65-year-old male could expect to live another 12.8 years. In 2014, a 65-year-old male could expect to live on average of 18 more years. The same is true for women. In 1950, a 65-year-o woman could expect to live another 15 years. By 2014, a 65-year-old woman could expect to live another 20.5 years.
Financial advisers are starting to change assumptions about how long clients will live to make sure they don’t outlive savings, according to a survey by InvestmentNews. Advisers are basing retirement-income plans on an average life span of 91 for men and 94 for women, according to the survey.